1. Energy and the Gulf Coast Economy Robert W. Gilmer Senior Economist and Vice President Federal Reserve Bank of Dallas October 2004 The views expressed in this presentation are strictly those of the author and do not necessarily reflect the positions of the Federal Reserve Bank of Dallas or of the Federal Reserve System. Any secondary distribution of this material is strictly prohibited. May be quoted with appropriate attribution to the author.

2. (Year-Over-Year-Growth) Annual Growth of Jobs in Gulf Coast Metro Areas

3. Annual Growth of Jobs in Gulf Coast Compared to U.S. (Year-Over-Year-Growth)

4. Unemployment Rate Gulf Coast vs. US: 2000 to Present

5. US Economy Global Economic Conditions Oil and Natural Gas Markets External Forces that Drive the Gulf Coast Economy

6. GDP growth slows to 0-2 percent in 2000 on the heels of Fed interest rate increases. Just as the Fed finished raising rates to slow the Old Economy, the NASDAQ collapsed along with the New Economy. By March 2001, the US economy is in recession as both Old and New Economies are hurt. Unprecedented rate cuts by the Fed revived the Old Economy, as housing, consumer durables and autos have done well throughout the decline and recovery. Recovery began in November 2001, but 9/11, accounting scandals, and Iraq provided shocks and uncertainty that kept business investment slow. U.S. Enters Recession in 2001

7. Recession Ends in November 2001 Coincident Index for US Economy

8. Gross Domestic Product Quarterly Percent Growth, Chained 2000 Dollars

9. Hangover from high-tech -- especially telecommunications. Series of continued shocks and uncertainty that have slowed investment: 9/11, accounting scandals, and the invasion of Iraq. The industrial sector was weak. A mild expansion implies mild recovery. Why has Recovery Been so Slow in the US Economy?

10. NASDAQ and S&P 500 are Once Again in Sync

11. Industrial Production Increases…

12. Retail Sales Growth Continues… Billions of Dollars

13. Housing Starts and Mortgage Rates 1997 to 2004

14. Housing Market Index Indicates Strength Homebuilders’ Index

15. Employment Growth Thousands per Month 1983 to 2004

16. --> 1990-91 Recession and Recovery --> 2001 Recession and Recovery Cumulative Job Growth After the Recession 1990-1991 Recession Compared to 2001

17. Productivity Growth Has Accelerated Since 1994

18. $10-$11 in winter 1997-98, but back over $20 by July 1999, touched $30 per barrel in February 2000, and $35 the following September. U.S. recession pushed crude under $20 per barrel,but back over $30 in September 2002. This year we saw $40, $45 and $50 per barrel in May, August and September. High Oil Prices Have Been With Us for Some Time Now

19. $50 barrel of oil today is $13 in 1973 or $27 in 1982. We have exported many of our most energy intensive industries. Energy conservation now part of building codes, fleet mileage standards, etc. Oil Matters Less to the Economy Today

20. Consumer Price Inflation Remains Low

21. 200320042005 US2.13.62.9 China9.19.07.5 India7.26.46.7 Euro Area0.52.2 Japan2.54.42.3 IMF World Economic Outlook Annual Percent Growth

22. Trade Weighted Value of the Dollar 1995 to Present

23. Stimulates local exports. Reduces foreign competition for domestic business. Direct impact on the US economy – indirect impact on Houston. Energy prices. Oil is denominated in dollars. Four Effects on the Gulf Coast Economy

24. Exports Increase with Weak Dollar

25. Baton Rouge Beaumont-Port Arthur Brazoria Corpus Christi Galveston-Texas City Houma-Thibodaux Houston Lafayette Lake Charles New Orleans Victoria Abilene Alexandria Austin Bryan-College Station Dallas Fort Worth Killeen-Temple Longview-Marshall Monroe Sherman-Denison Shreveport Texarkana Tyler Waco Wichita Falls Gulf Coast and Interior Cities

26. On the Gulf Coast … Oil and Gas Heavy Construction Chemicals Refining Water Transportation Pipelines Misc. Repair Engineering and Management Inland Cities … Oil and Gas Electrical Machinery Communication Wholesale Trade Transportation Services Banking and Finance Military Industrial Strengths of Gulf Coast and Interior Metro Areas – Selected Industries

27. Gulf Coast Metro Interior Metro U.STexasLouisiana July 1990- March 2001 2.13.21.82.81.8 March 2001-Nov 2001 -0.8-2.9-1.6-1.5-1.6 Nov 2001- Present 0.0-0.30.10.00.1 Employment Growth: Gulf Coast vs. Interior Metros (Annual Rates)

28. Unemployment Rates on the Gulf Coast and Interior Metros 1990 to Present

29. Refiners’ Acquisition Cost of Crude Oil 1994 to Present

30. Wellhead Price of Natural Gas 1994 to Present

31. Oil at $30, Gas at $5 What is Wrong With Drilling?

32. International Rig Count

33. Distrust of OPEC/ Distrust of Price/ New- found Discipline Big Company Consolidations/ Property Sales Balance Sheet Concerns/Uncertainty Over Iraq No Prospects at Home Only Bad Places to Go Overseas Where is the Drilling Boom?

34. Percent of Drilling Directed to Oil 1987 to Present

35. Natural Gas Inventory Swing 2001-2003

36. Breakeven Input Prices for Oil and Natural Gas to Produce Ethylene

37. Cash Margins, Ethane Ethylene Margins

38. Texas and Louisiana Gulf Coast, 1986 to Present No. of Projects New Hydrocarbon Project Announcements

39. 1990 to Present No Boom in Oil Extraction Jobs in Gulf and Interior Cities

40. 1990 to Present …Or in Manufacturing Jobs

41. Not Seasonally Adjusted, Based on Five Weights Purchasing Managers’ Index

42. The Gulf Coast economy is growing strongly, but not generating jobs -- even with high energy prices. Sharing in U.S. productivity growth explains part of the weakness. Energy helps, but not like it used to. Oil does not drive drilling now, there is a lack of prospects for natural gas, and an unwillingness in invest in U.S. Chemicals have lost their competitive advantage if natural gas is no longer a surplus commodity on the Gulf Coast. In the past strong U.S. and world growth, combined with high energy prices, would have meant annual rates of growth of 4-5 percent of higher. Times are clearly changing. Conclusions